In Competing With China, the US Should Realize the Virtues of the Rules-Based Order Speak for Themselves

How can the United States lead without categorically opposing China’s international role and leadership?

By Theresa Lou for The Diplomat

February 25, 2018

Early February, ahead of his trip to Latin America, U.S. Secretary of State Rex Tillerson cautioned America’s southern neighbors against relying on “China’s state-led model of development,” which “trade[s] short-term gains for long-term dependency.” His remarks predictably drew backlash from Beijing, which has spent the last decade deepening its economic relationship with Latin American and Caribbean (LAC) countries.

Tillerson likely expected to step on Beijing’s toes, but his statement also irked some LAC countries that have warmed to Beijing amid difficulty securing development finance from Western-led development banks. LAC nations are now the second largest destination for Chinese overseas investments, and China is the largest trading partner for the region’s leaders including Brazil, Chile, and Peru. The administration’s rhetoric risks pushing neighboring nations into a choice between the United States and China, an ultimatum with the prospect of alienation.

The ongoing U.S.-China geopolitical competition in the region highlights a broader problem for Washington policymakers: How should the United States address Chinese efforts that seemingly benefit the global community, but undermine U.S. influence and challenge the liberal world order? The United States needs to develop a strategic response that preserves its interests without categorically opposing Chinese contributions to the international system.

As China’s economy boomed over the last decade, Beijing has shouldered more political responsibility within the international system. China has contributed to UN peacekeeping missions, conducted humanitarian assistance and disaster relief operations, and participated in global initiatives like the Paris Climate Agreement.

But that is not all. China has invested much of its newfound wealth in crafting new multilateral institutions. Instead of “strengthening the international system” as former Deputy Secretary of State Robert Zoellick called for in 2005, China worked outside of it, establishing the Asian Infrastructure Investment Bank (AIIB) and New Development Bank (NDB), both of which parallel existing Western-led multilateral development banks (MDBs). In 2013, Chinese President Xi Jinping also announced the ambitious Belt and Road Initiative (BRI), which aims to economically integrate China with Europe, Africa, and the rest of Asia through infrastructure development.

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These China-oriented initiatives have merit, as they provide much needed investment dollars to some of the world’s fastest growing regions. In 2017, the Asian Development Bank (ADB) estimated that Asia’s infrastructure needs would cost more than $26 trillion through 2030 for the region to maintain growth momentum. Demand for development financing far outstrips the supply, and AIIB could help shrink the gap. Similarly, BRI intends to provide participating countries with loans to construct or upgrade infrastructure and help facilitate flow of trade and investments.

However, these efforts also illuminate China’s emerging institutional statecraft in pursuit of its own interest while undermining U.S. global leadership. These parallel structures give China a larger role in global development finance while diminishing U.S. ability to shape the norms and standards in these sectors, resulting in a world that is “less free, less open, and less inclusive.”

Beijing has a record of economically punishing countries for acting against Chinese interests, a worrying trend that could worsen as China’s leverage and influence grows with its BRI investments. Additionally, Chinese loans risk creating debt traps for recipient countries that China can then exploit. Such negative externalities manifested in Sri Lanka, which leased the port of Hambantota to China in December 2017, to help repay part of Colombo’s $8 billion debt to Chinese state-owned enterprises. As Beijing’s economic footprint grows internationally, likely too will its military presence. By controlling Hambantota, which lies on Sri Lanka’s southern coast, China gains access to critical Indian Ocean sea lanes and could operationalize the port at which Chinese warships and submarines could dock.

Learning Lessons the Hard Way

Thus far, the United States has proven unable to effectively respond to China’s growing activism. The first prominent sign emerged in 2015, when the Obama administration lobbied against the creation of AIIB. Although China insisted that AIIB would complement the World Bank and the ADB, U.S. officials remained concerned over AIIB’s proposed policy guidelines and whether it would meet global environmental and labor standards. U.S. efforts to marginalize the AIIB “failed miserably” as close allies—such as Canada, Germany, and the United Kingdom—joined AIIB despite U.S. discouragement.

Although Washington had legitimate qualms over AIIB’s regulations and transparency, the global community largely perceived U.S. resistance as petty paranoia. Some commented that the Obama administration appeared to have opposed AIIB “simply because it was a Chinese initiative.” The inability for existing MDBs to adequately provide financing for Asia’s infrastructure needs also promoted the view that the United States was “standing in the way of what everyone… unquestioningly accepted was a good thing.”

Outright opposition to Chinese-led institutions in the future will likely continue to backfire. This will be particularly true for Beijing’s global development initiatives even if Chinese money comes with political strings. But without a comprehensive alternative to Beijing’s initiatives, the United States may gradually lose influence to China, which increasingly seeks a larger role in shaping the world order.

Such strategic dilemmas are illustrated in the U.S. failure to devise a strategic response to BRI. The initiative promises much needed investment dollars to participating countries, many of which are concerned about U.S. commitment to global leadership and continued economic and security assistance under the Trump administration. Opposing the initiative without articulating an alternative U.S. trade and investment agenda risks repeating the “AIIB mistake.” On the other hand, accommodating BRI could further China’s strategic aims while undermining the rule-based liberal order that the United States helped construct.

The Struggle for Global Leadership

As U.S.-China geopolitical competition intensifies, U.S. policymakers will need to do more than merely avoiding knee-jerk reactions to China-oriented initiatives, which are not inherently bad. The United States can recognize the value of efforts like AIIB and BRI while consistently calling Beijing out when its efforts do not abide by global standards or create negative externalities. Washington and its allies should help provide recipient countries with technical assistance to evaluate the risks of proposed BRI projects.

Just as importantly, Washington needs to work with U.S. allies to strengthen and improve existing institutions. Part of the appeal of Beijing’s parallel structures is that they highlight the inadequacies of the current system. Established in the wake of WWII, most international institutions have yet to adapt to today’s power and economic dynamics. Emerging economies remain underrepresented in the decision-making process, undermining the credibility and legitimacy of multilateral organizations. Moreover, MDBs have instituted procedures to ensure that proposed infrastructure projects and loan recipients meet high environmental and labor standards, but these rigid and time-consuming processes have increasingly deterred developing countries from turning to the World Bank or ADB for funding. To address some of these concerns, existing MDBs should increase the voting shares of developing nations to more accurately reflect their status in the global economy, and streamline the loans approval process to more effectively facilitate project implementation.

Finally, Washington should continue its commitment to global leadership and to shaping the norms and policies of multilateral institutions. The United States has greatly benefited from the liberal order that it helped create nearly seven decades ago, but President Trump’s proposed FY19 budget requests just $1.4 billion in funding for MDB, bringing U.S. funding commitments to pre-2010 levels. In contrast, Xi pledged more than $100 billion (780 billion RMB) in extra funding to support BRI at the inaugural Belt and Road Forum last May.

Without proper funding levels, Washington gives Beijing the opportunity to shape international institutions and rules to suit Chinese priorities and values, which are unlikely to match those of the United States. Instead of broadly opposing China’s growing influence, the United States should continue to lead. The virtues of the rules-based international order speak for themselves.

Theresa Lou is a research associate in Global Governance and Security Studies at the Council on Foreign Relations.